The reason why SM is against HYBE's hostile takeover

[nudrive]

SM just dropped a video on the official SMTOWN Youtube channel highlighting why they're against HYBE's hostile takeover

Click to view

TL;DR Summary
[Recap]Recap:

• 9th Feb HYBE buys LSM's shares and becomes largest shareholder of 14.8%
• HYBE announced they want to acquire ~40% of the stakes
• None of this was consulted with current management and board which constitutes as a hostile takeover attempt
• HYBE wants to control management by dominating the board of directors as it would be difficult for SM to pass decisions with only a 60% majority

[Legalities]
Reasons why this is an issue:

1. HYBE is being irrational/ legalities

• During the M&A disclosure process HYBE have not done any due diligence (risk and compliance checks when merging/ acquiring companies)
• It's 1 trillion won deal with HYBE having to take out a short term loan to finance it
• Board of directors somehow approved of this without HYBE doing any of these audits and asking for this information from SM
• SM believes this will drop the corporate value and share price of the company
• Purchasing of old shares and tender offering at 120k (this is public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time) were planned simultaneously and announced on the same day. This should be considered 1 deal and must go through the preliminary examination of the Fair Trade Commission but this did not happen.
• They secured the shares first to have an advantageous position at the SM shareholders meeting before undergoing the examination. In the event that this is M&A is rejected due to risk of monopoly these large number of shares will be released into the market leading to a plummet in share price.
• SM's share price has already exceeded the tender offer price

[Risk of monopoly]2. Risk of monopoly

• SM Ent and HYBE are the leading entertainment companies so merging both lead to a very high risk of HYBE becoming a monopoly.
• Based on SM and HYBE's combined profits from the 3rd quarter of last year they would be taking 66% of the total market revenue, 70% of all album/ digital music sales and 89% of concert/ performance profit. They would also own 64% of all of the artists with top 100 albums.
• Constructive competiton has kept the kpop industry alive thus far and HYBE owning over 50% of the market would lead to a reduction in diversity of the kpop market with smaller companies being shut out even further.

[Impact on artists/ company/ shareholders]3. Impact on artists/ company/ shareholders

• Number of releases put out by each company alread exceed the recommend ~100 per year, as HYBE already has many artists from their multiple labels they're likely to put SM artists on the back burner and priortise their own.
• SM will have to give up their fan platforms that they've already invested in without any benefit to SM.
• HYBE will likely take all ownership of SM 3.0 strategy and apply it to the whole company which will put SM at a disadvantage
• If HYBE exercises 100% management rights most of the decisions will reflect their interests rather than the interests of the SM shareholders - returning to an old bad practice

[Impact on fans]4. Impact on fans

• Fans will be at a disadvantage, as HYBE can single handedly control prices of albums, merch, concerts etc.
• HYBE have already almost doubled concert ticket prices in the past few years
• Once they acquire a group their ticket prices also increase
• Fewer fans will have the ability to enjoy kpop

[Employees perspective]5. Employees perspective

• 85% employees and 25 SM exceutives including CEOs all oppose to the hostile take over for the sake of shareholders, fans kpop industry and employees

Lastly the strategic partnership with Kakao will be disclosed soon. This is relevant because Kakao also wanted a piece of SM. Kakao currently controls about 5% of the SK entertainment market whilst HYBE has 33%, with SM Kakao would still own less than HYBE at 25%.

Source: SMTOWN



Wonder when HYBE will announce them trying to acquire Avex too... 😬